Archives: China Film Industry

China TrademarkA couple years back, I wrote a post explaining why it rarely made sense to file a trademark application in China via the Madrid System. Nothing has changed substantively since then, but a growing trend among foreign rightsholders has made the Madrid System even less relevant.

As I have written previously, the Chinese Trademark Office (CTMO) does not require trademark applicants to prove use of the mark at the time of application, or any time thereafter (unless a third party seeks to cancel the mark for non-use, which is only possible after three years). As a result, many corporations—especially multinational corporations facing an onslaught of counterfeit merchandise—have started filing applications that cover a range of goods far greater than what they are actually producing or selling. Although we don’t represent Starbucks, I like to hold them up as an example of the gold standard in “offensive” trademark registration. They have registered the word “Starbucks” in China as a trademark in all 45 classes of goods and services. Starbucks brand diapers? Covered. Starbucks brand patio furniture? Covered. Starbucks brand binoculars? Covered.

As far as I know, Starbucks has not sold and has no plans to sell branded diapers, patio furniture, or binoculars. Accordingly, it would not be able to register trademarks for such goods in the United States or most other countries in the world –and therefore could not use such registrations as the basis for a Madrid System application. In other words: the only way Starbucks, or any other company, can take advantage of the China trademark system’s unique protections would be by filing a national trademark application in China.

The only mystery to me is why more companies with the means and motivation aren’t taking advantage of the Chinese trademark system. I just did a quick search for “Star Trek” on the CTMO database—not that I’m looking forward to Star Trek Beyond or anything—and the folks at Viacom are just asking for trouble. They have registered “Star Trek” in only classes 9, 16, and 41, which means that an entrepreneurial Chinese company could soon be boldly going where no man has gone before. Star Trek vitamin supplements, anyone?

China trademarks at customsA few weeks back, China Customs released its IP protection statistics for 2015. The data revealed a number of interesting trends, many of which were summarized in Mark Cohen’s China IPR Blog. I’d like to focus on two in particular.

1. Trademark infringements made up 98% of the items seized, with copyright and patent infringements combined accounting for the remaining 2% of seizures.

A simplistic (and incorrect) interpretation of this statistic would suggest that trademark infringement is a far bigger problem than copyright and patent infringement. In fact, the reason for the disparity is that it’s relatively easy for a customs inspector to tell if a product is violating a trademark based on a quick visual inspection – and almost impossible to tell if a product is violating a copyright or trademark. This does not mean that copyright and patent holders should throw up their hands and give up; it just means they should pursue other avenues. For copyright holders (especially owners of movies, television programs, recorded music, and books), it largely means pursuing download sites and the service providers that host them. For patent holders, it means filing lawsuits in China and/or the US, and pursuing 337 actions in the US.

2. Of the items seized by Chinese Customs, the vast majority (98%) were seized based on a tip given to China Customs by the rightful IP rightsholder. In 2014, the percentage of goods seized due to such a tip was 65%.

Put together, these statistics strongly suggest one or both of the following: (1) IP rightsholders are actively engaged in pursuing infringers and (2) customs officials are kept busy enough with tips from IP rightsholders that they don’t have time to conduct many inspections on their own. (Chinese Customs inspects goods either on its own authority or based on a specific request from an IP rightsholder.) Either way, even if counterfeit product bearing your trademark is being regularly shipped from China, there’s only a miniscule chance it will be stopped at customs if you aren’t being proactive. What does it mean to be proactive? First, register your trademarks in China. Second, register those trademarks with Chinese Customs. Third, track the counterfeit product, which these days mostly leaves China via e-commerce. At the very least, you need to have a handle on what’s being sold on Alibaba, Taobao, JD.com, and other key Chinese e-commerce sites. Once you understand who is selling your goods and where the goods are coming from, you can start to engage customs.

For trademark owners, customs seizures can be a valuable part of an anti-infringement strategy. But don’t expect much help from the customs authorities if you can’t be bothered to help yourself.

China taxes

This is the second in a series of posts about problems encountered when attempting to get paid by a Chinese company. In Chinese Company Won’t Wire You Money. Have the Rules Changed? I looked briefly at the underlying framework of rules applying to foreign conversions and remittances. In this post I consider tax-related issues that can often cause payment delays or defaults. These issues vary depending on the nature of the payment. Let’s look at the three areas of payment encountered most by our China lawyers.

Payments to foreign service providers. These days the Chinese tax authorities routinely impose a tax on all payments from Chinese companies to foreign service providers. The problem is identifying the appropriate tax. Is it withholding, VAT, business tax, income tax or some combination? Even when the appropriate kind of tax, or combination of taxes, has been determined there is little consistency on the percentage amount of tax withheld.

Royalties. Where there is a royalty payment for a technology or an IP transfer, the underlying contract is supposed to be registered, which can be a time-consuming procedure in certain districts. For example, where the royalty is for a license to publish, the license must be approved by the Beijing authorities in charge of that area of publication. Where the license is for a trademark, the license must be registered with the trademark office. If there is no registration, no payment can be made. For royalty payments, the liability to withholding and VAT is clearer but there is still little consistency on the rates of tax and how they are combined.

FDI or M&A. Such payments from China require approval and usually this approval must come from Beijing. Approval is uncertain and the authorities may change their minds. Thus, a transaction that the Chinese side in good faith assumed was approved can be denied at the last minute, due to a sudden and unexplained denial of permission to remit.

There are two difficulties common to all three kinds of remittances.

First, tax authorities in many districts now require proof of the existence of the foreign payment recipient. Compliance with this additional requirement often involves production of a certificate of good standing authenticated by the Chinese embassy or consulate in the foreign country concerned. This is expensive and time-consuming.

Second, the procedures are often interpreted and applied differently from bank-to-bank, branch-to-branch and district-to-district. The tax rates, too, are not always consistent from district-to-district and even within districts from officer-to-officer. The whole situation is in flux.

The result is that there is really no way that any side of a China deal can be completely certain that a payment will go through until after the payment is received.

In my next post I will look at the due diligence you can do to identify or avoid defaults or delays in money transfers out of China.

China Media and Entertainment LawOur lead China media and entertainment lawyer out of Beijing, Mathew Alderson, was recently interviewed for a VICE Sports story by Joshua Bateman, entitled, The UFC With Chinese Characteristics. The full text of the interview is below, with the publisher’s kind approval.

Alderson: I understand the UFC [Ultimate Fighting Championship] business is to be conducted by a Nevada LLC. The company promotes and produces mixed martial arts events broadcast free-to-air or through subscription services. I understand the company to have a broadcast deal with Fox Sports. The company is reportedly in discussions with Chinese buyers or investors. You are therefore interested in the effect Chinese ownership or investment may have on the management and regulation of the company.

At the outset, it should be appreciated that Chinese ownership of the Nevada LLC (or any other non-PRC company) would not, of itself, bring the company under Chinese regulation. The company would continue to be subject to regulation in the place in which it is established (Nevada and the United States) and the place or places in which it conducts business. The UFC would only become subject to Chinese regulation to the extent it conducts business in China. As a foreign company, the UFC could only promote its events in China with the assistance of a local partner with the necessary permits and licenses. Production of TV programs in China would also require the assistance of such a partner, probably a local co-producer. This is because foreign investment is restricted in the sectors in which UFC operates.

I answer your questions with these introductory remarks in mind.

VICE Sports: Is it possible Chinese regulators would view the UFC as a media company, and that would impact investment opportunities or how the company is regulated in China?

Alderson: Yes, it is possible because the UFC business model involves promoting live events and producing and broadcasting TV programs. These are sectors in which foreign investment is restricted. The impact would depend on whether the UFC established an entity in China and whether that entity is wholly Chinese or partly foreign-invested. A foreign-invested entity would attract greater scrutiny. The impact would be less if the Chinese market were approached by licensing content into China.

VICE Sports: If the UFC were to be acquired or were to accept investment from a Chinese company, would there be political/regulatory pressure in China for the company to alter its management or board structure to have more Chinese representation?

Alderson: Again, it would depend on where the company is operating and where the investment is made. There would be more scope for such pressure if a unit of the company were established in China, whether as a fully Chinese company or as a foreign-invested company. It would be much harder for Chinese owners to exert, or be subject to, this kind of pressure in holdings outside of China; although, if they had the necessary voting rights, Chinese owners could — like any investors — control or at least influence management abroad.

VICE Sports: If current UFC ownership does not sell the company but instead attempts to expand in China going forward, could they do so on their own or would they most likely need to join forces with a Chinese partner?

Alderson: They would need Chinese partners because foreign investment is restricted in the sectors in which they would likely be operating. The most likely business models are joint ventures and co-productions.

China copyright takedownsThis is the fifth in our series about online copyright takedowns in China. In Copyright Takedowns in China, we provided a general summary of the regulations that establish the takedown procedures. These regulations enable enforcement of the “right of communication through an information network” as it applies to sound recordings and audiovisual recordings. In Copyright Takedowns in China Part II: Searching, Linking or Storing? we looked at how providers of storage space face more liabilities than those merely providing searching or linking services. In Copyright Takedowns in China Part III — Audiovisual and Sound Recordings in the Cloud, we discussed how China’s takedown regulations apply to cloud service providers. In Copyright Takedowns in China, Part IV: Whatever you do, Register your Copyrights First, we made clear that “if you ever expect to have infringing content taken down the single most important thing you should do is register your copyright in China in advance.”

In this post we discuss your options after you have succeeded in taking down copyright material.

One of the problems with China’s notice and takedown system is that, after the material has been taken down, a copyright owner’s further recourse against an infringer is uncertain. This is because it’s hard to identify an infringer who has allowed material to be taken down in response to a notice. Infringers are only required to identify themselves to the copyright owner if the infringers object to the takedown. Without the identity of the perpetrator it’s hard, though not impossible, to initiate copyright infringement proceedings in China. The infringer tends to remain anonymous.

Solutions and practices are only slowly emerging in response to this problem in China and elsewhere.

One possible solution is a “notice and trackdown” procedure. With such a procedure in place rights owners can identify infringers and hunt them down. The implementation of something like this would require a balancing of the rights of copyright owners with rights of privacy. It would require an exploration of whether there should be an expectation of anonymity in cyberspace.

Some time ago, Frederick Mostert and Martin Schwimmer provided an excellent discussion of the issues in “Notice and Trackdown,” a paper published in Intellectual Property Magazine.

The issue is one of several covered recently in “Notice and Takedown in Everyday Practice“, a report by Jennifer M. Urban and Brianna L. Schofield, both of UC-Berkeley School of Law, and Joe Karaganis, of Columbia University. Part of the “Takedown Project“, the report considers the effectiveness of the notice and takedown process since The Digital Millennium Copyright Act was passed by Congress in 1998. In their findings, the authors conclude that, “Analyzing the effectiveness of [the] procedures in responding to infringing materials on specific sites, balancing copyrights and speech rights … is severely limited by the law’s lack of requirements for publicly disclosing information on notices sent and [online service provider] responses.”

Will we see the balance tip away from online anonymity in China? It would certainly suit copyright owners but it will be hard to say where anonymity should end and accountability should begin.

China Film IP
China Film IP

China film IP is hot.

During the Beijing International Film Festival last month, Mathew Alderson, who heads up our China media and entertainment practice, gave a presentation on China film IP. Presenting alongside Mathew was Tom Duke, Senior IP Liaison Officer at the British Embassy Beijing. This was a special event for the British Film Institute delegation to China.

Topics covered in the presentation included:

  • Top tips for film IP in China
  • The film business as a “restricted sector”
  • Sino-foreign film collaborations and co-productions
  • The UK-China Co-Production Treaty
  • Copyright in China
  • Contracts in China
  • The Internet and digital ancillaries

The UK Government recently published a Factsheet based on the presentation, stating as follows:

Increasing UK-China film cooperation is offering British films access to revenue streams in the Chinese market through a variety of business models. The Chinese intellectual property (IP) system has developed rapidly over the past 30 years. But a number of differences remain between international norms and the structures of the Chinese film industry and IP system. It is important for British companies to be aware of these differences and to prepare accordingly.

For more on China film IP see:

China motion picture copyrights

China’s film industry online — it’s about copyrights

China LawyersDue diligence is an investigation of a business or person prior to entering a contract. It often involves a comprehensive appraisal to establish assets and liabilities or to evaluate commercial potential. Though due diligence is important anywhere, it is doubly so in China where things are often not what they seem.

A failure to undertake due diligence is usually a factor, if not the decisive factor, in losses suffered by foreigners in their dealings with Chinese businesses. My firm’s China lawyers regularly encounter contracts signed with non-existent Chinese companies. We see deals with companies that are not owned or controlled by the people who handled the negotiations or made the promises. We see deals with companies that can never lawfully do what they promised to do. All of these problems could have been avoided with a basic company search report. By the time they came to light it was too late to fix them.

China company search reports are an important part of due diligence. They can confirm whether the Chinese company exists and, if so, whether it is in good standing with all of its annual filings up to date. Critically for enforceable contract formation, search reports confirm the full name and registered address of a company. A company search report will identify the individuals with effective control over the management and operations of the company. It will identify the stockholders. It will confirm the business scope, i.e., the business activities in which the company may lawfully engage. Depending on the relevant industry or business activity, lawful operations may require a number of other permits or licenses. These too can be found as part of the search process. In many cases, company search reports can garner other useful information published by the authorities.

Most of the important records are publicly available at the national Administration of Industry and Commerce (AIC) or the AIC offices in the municipality or the province where the relevant company is registered. The search process is relatively straightforward for anyone with the expertise and language skills. Searches should only ever be based on publicly available records but the information revealed should nonetheless be regarded as sensitive. Particular care should always be taken to ensure that captured information could not be regarded as secret.

So when things go wrong, don’t blame your Chinese counter-party if you never even bothered to check things out. China has a good system in place for anyone who cares to use it. In our experience, reputable Chinese businesspeople are untroubled by company searches and will readily provide key documents and information to make your search faster and easier. All you need to do is ask politely at the right time.

There is a right way and a wrong way to do business with China
                 There is a right way and a wrong way

I meet a lot of foreigners skipping through China on business. Many of them are delegates on trade missions or attendees at festivals or summits. They frequently allow their Chinese friends to pressure them to sign little documents while they’re in town. The foreigners think there can’t be much harm in signing short, “informal” documents with harmless sounding names like “LOI”, “MOU” or “HOA”. The artificial deadline tactic always seems to work for the Chinese whenever they try it on. Often there’s a kind of ceremony with officials in attendance and some nice banners in the background. Lots of photo opps. There may even be a banquet or two with the obligatory over-consumption of baijiu. More photo opps. It’s lots of fun and the foreigner goes home with a sense of achievement. They signed a deal in China!

Then we get two types of calls.

In the first type of call, the foreigner is shocked to find that their Chinese friends are resisting a long-form document by which the foreigner wishes to replace that harmless little LOI. The long-form is invariably written entirely in English and is full of common law irrelevancies and foreign standards that make it entirely unsuitable for China, not to mention disrespectful. Even if it ever gets signed it will take ages — ages during which there is good reason for the Chinese to stall in making any expected payments. Or the Chinese may even threaten to take action based on the foreigner’s negligence in the contracting process. But that’s all beside the point. The point is that the Chinese got what they wanted in their first pass so there’s no need for them to sign another document. The foreigner gave too much away in the beginning. My favorite examples in the film industry are the foreign producers who give away Greater China distribution rights without any mention of distribution costs and an appropriate waterfall. There are many more such examples across all industries.

Then there’s the second type of call.

The foreigner is disappointed that six months have gone by and nothing has happened since that harmless little LOI was signed. Emails are going unanswered. Phone calls unreturned. Suddenly, nobody speaks English any more. What the foreigner didn’t grasp was that the ceremony, with its banners and officials and photographs, was all the Chinese ever wanted from the relationship. There was no deal. The Chinese hit all their KPIs for that quarter by holding a little ceremony. The higher ups are happy and everyone in China has long ago moved on.

So, you need to decide from the outset whether you want an enforceable agreement or an unenforceable document. Do you want a real deal or do you just want to be able to tell people about some ceremony you attended.

If you want an enforceable agreement there is no reason why you can’t enter a proper agreement covering everything right from the start. Agreements in China tend to be shorter and less complicated in any case. That’s not to say that they can’t cover everything.

If all you want is an unenforceable document then you’ve got to wonder why you should sign anything at all. There’s an art to signing meaningless and unenforceable documents just as there is an art to signing something enforceable. But is it really worth it?

China Film Event. Photo by Sina Daily News
Photo by Sina Daily News

AmCham China’s Media & Entertainment Forum is putting on a what is sure to be a great event in Beijing on Thursday April 21st, from 5:30 p.m. to 7:00 p.m.: “China film finance — in conversation with Bennett Pozil of East West Bank.”

AmCham describes the event as follows:

China’s film business is growing at an astounding rate. The Chinese box office will eclipse North America’s in only a few years. Every week brings announcements of exciting new Sino-US film projects, investments and acquisitions.

Continue Reading China Film Finance Event, April 21 in Beijing

Getting money out of ChinaThe 40th Annual UCLA Entertainment Symposium took place this past weekend, and in recognition of the Chinese film market’s meteoric expansion, the symposium for the first time devoted an entire panel to China. The panel featured three high-powered Chinese film execs: Eric Rong, President of TIK Films, Jay Sun, Chairman and President of Pegasus Media Group, and Simon Sun, Executive Vice President of Le Vision Pictures (USA).

The panelists were uniformly positive about the future of US-China film cooperation and mutual investment, but the most interesting exchange (to me) was when they addressed the question of Chinese currency restrictions. The panelists agreed that getting money out of China was difficult and becoming more so, and commented on two general solutions. First, Chinese companies with substantial cash reserves in China can set up a credit facility with an international bank with a US presence; Rong said that this is what TIK Films’ parent company Hunan TV did with East West Bank (e.g., to finance its big deal with Lionsgate). Second, Chinese companies can set up a Hong Kong company and send money from that company, as Hong Kong dollars are freely convertible; this is what Pegasus does, according to Jay Sun.

These solutions are sophisticated, appropriate and (not surprisingly) in line with how we often advise our entertainment (and other) clients. A word of caution, though: these approaches will only work as long as the Chinese government allows them to work. Yes, Hong Kong doesn’t have currency restrictions, but companies still need to get the money to Hong Kong in the first place, and that  requires pretty much the same approvals as sending money to the US directly. Alternately, Chinese companies can get money to their Hong Kong company by requiring that customers send payments to Hong Kong for goods or services provided in China. This is perfectly acceptable—so long as the Chinese companies have secured prior Chinese government approval for the Hong Kong bank account and report and pay taxes on such payments. I think you can guess how often that happens. The Chinese tax authorities haven’t been overly assiduous about enforcing these restrictions over the past several years, but I would be surprised if that didn’t start to change.

To give you an idea of how often these Hong Kong bank accounts are set up legally, many years ago we represented a very large publicly traded U.S. company that had just bought a China WFOE. All twenty of the WFOE’s major China-based suppliers were getting paid in Hong Kong. Our client did not like this, because it felt it might be seen as facilitating tax evasion. So our client requested that the suppliers provide proof that their Hong Kong bank accounts had been approved by the Chinese government. We got the following responses:

  • 4-5 said, “Are you kidding? Everybody does this and no one gets approval.”
  • 4-5 said “Are you kidding? I’m not going to send you any documents.”
  • 4-5 sent us non-responsive documents they apparently thought we would take to be Chinese government documents allowing them to open a bank account in Hong Kong.
  • The remainder just ignored our request.

Not a single one of them produced a shred of evidence that their Hong Kong bank account had been approved by the Chinese authorities.

Another common method of converting RMB to dollars (not mentioned by the panelists because it isn’t relevant to the financing of major studio films) is the “exception” that allows each Chinese individual to send $50,000 overseas each year. Wealthy Chinese individuals seeking to fund a movie or Broadway show, purchase real estate, or invest in an EB-5 project have taken advantage of this loophole by recruiting a gaggle of people in China to send money on their behalf. This process, known as “smurfing,” has been widely used for years. I’ve met multiple people at the US-China Film Summit who proudly told me their entire business model was based on facilitating these payments. At dinner the other night, an acquaintance told me about a Chinese factory owner he knew who had required 200 of his employees to send $50,000 each to the United States. But smurfing is legally questionable and the Chinese government is claiming down on this as well. As my colleague Steve Dickinson observed in a recent interview with Bloomberg Business, banks are sometimes refusing such transactions by saying they simply don’t have any dollars available.

Long story short, we can expect to see more US-China film deals fall through for lack of funding, and it won’t necessarily be the fault of the Chinese company. Simon Sun referred to a piece in the Los Angeles Times last year (presumably this one) about the large number of US-China deals that had fallen apart because the money never came through. Sun stated that the article was true, but biased – deals have been falling through as long as Hollywood existed – because the legitimate Chinese companies are real (and have real money). I couldn’t agree more. But it’s often hard to tell who’s for real, which makes both due diligence and the way the deal is structured more important than ever.